Welfare implication of determinants affecting aggregate consumption expenditures in Rwanda

3.5.2 Recursive estimates (OLS only): Cusum test

With CUSUM test, the pace of the graph shows that the parameters of this model are stable when it is noticed that the representative curve is located between the two lines indicating the critical point of 10% level of significance. If it is not so, parameters are said to be unstable.

62

^{12 8 4 0 -4 -8 -12}

^{00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15}

Source: World Bank indicators1995-2015 and author's computation Figure 4: Cusum test

^{CUSUM 5% Significance}

The graph shows that the parameters are stable because the shape of the curve is (shape in blue color) between two critical points.

Partial conclusion

This chapter was aimed to verify the impact of National income (GDP), interest rate, inflation rate and exchange rate on gross consumption expenditure in Rwanda. To achieve our goal, we have chosen different econometric tests, the unit root test shows used variables are not stationary at both level and stationary first difference but they are stationary at second difference. We have undertaken co-integration test and estimate long and short run equation. After estimation, the researcher has realized that in the long-run analysis, GDP are related positively to the GCE. All coefficients independent variables are statistically significant at 5% level of reference, in long-run. R-squared equals 99.8% and Adjusted R-squared equals 99%, show the goodness-of-fit of estimated model. Up to 99.2% of long-run fluctuations in GCE are influenced by changes GDP. By these findings, the researcher affirms the second hypothesis above verified stated that there is statistical significant relationship between GCE and its associates in Rwanda. According to the result of diagnostic test, that the model is good and respects the classical assumption of homoscedasticity, no autocorrelation of errors and no serial correlation as well, there is

63

normality of residuals and stability of parameters. The researcher also noted that the model is stable. Therefore, the researchers affirm the second hypothesis that there is a long run relationship between gross consumption expenditure and its associates in Rwanda from1995-2015.

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GENERAL CONCLUSION AND SUGGESTIONS

From the above output of long run equation, one, the gross domestic product (GDP) is positively related to gross consumption expenditure (GCE) as expected in theory. This means that, when GDP increases by one more units, GCE increases by 86% by considering other variables constant. (Ceteris paribus)

Two, the interest rate is negatively related to GCE which means that: increases by one more units in interest rate, decreases gross consumption expenditure (GCE) by 3.2%, ceteris paribus. This is because the higher the interest, the lower the investment and this discourages consumption.

Three, from the findings, the inflation rate is negatively related to GCE which means that an increase by one more units in inflation rate decreases the GCE by 4.0% ceteris paribus. This is because a continuous rise in prices reduces the level of consumption expenditure.

Four, the exchange rate is negatively related to GCE which means that: an increase by one more units in exchange rate (depreciation) decreases the GCE by 2.5% ceteris paribus. Rwanda like other developing countries depends much on imports and this shows how the demand for the foreign currency ($) is always high compared to the demand of the local currency. The level of export like Tea, and Coffee is very low and its price is also low compared to foreign export on international market. Therefore the Government has to intervene with its reserves to cover this deficit therefore the wellbeing of the community can be enhanced in Rwanda.

SUGGESTIONS

If Rwanda wants to induce its level of economy, maintain the wellbeing of people and become more competitive in order to participate in international trade, the following should be done:

V' Policymakers in Rwanda should strengthen efforts to control the rate of inflation in order to become more competitive in durable way. This can be achieved if internal as well as external sources of inflation are addressed.

V' Rwanda should continue to encourage capital inflows and investments from local investors as well as foreign investors. Investors are revenues from capital inflows should be oriented in sectors where Rwanda has comparative advantages by insisting on sectors which can allow the country to increase exports and improve its competitiveness in international markets. For sure, the increase and a good management of those investments can help the country firms to enjoy economies of

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scale and their advantages. This will help the country to increase its level of domestic production and the welfare of the community.

V' Rwanda is advised to continue to encourage investments and orient them in technological use and that technology should be used in strategic sectors able to increase the Rwanda production and export as well. The technological use also can allow the country to produce more and to export products with increased value. This high level of production will reduce the level of unemployment which is at high level and will reduce the external dependency as well.

V' As openness has been found to bring effects on Rwandan competitiveness in international trade while closeness brings negative effects on it, Rwanda is advised to continue its movement of reducing trade barriers in international trade. This can be done by supporting the idea of economic integration but via increment of production in quality and quantity as well as the cheapest ways of connecting the country with other countries should be a priority. Economic authorities must sensitize people to participate in economic integration and expand the market. Rwanda is advised to look forward rapid economic growth to middle income status via implementing development policies, increase poverty reduction measures, enhance private sector as engine of growth via increasing youth entrepreneurship and job creation therefore the welfare can be consistent.

66

REFERENCES

(A) Books

· A.C Pigou (1932): `The economics of welfare' Macmillan and Co., 4th edition, London, UK.

· ASSIMWE M. K (2009),»Fundamental Economics»2 ^nd edition.

· Blanchard O. (2003): `Macroeconomics», 3^rd edition, USA.

· Blanchard Olivier and Cohen Daniel (2006):'Macroeconomics'4^th edition, Paris

· Christopher D. C. (2016) `Two-Period Optimal Consumption Problem': 2Period LC Model

· Fisher, Irving (1930): `The Theory of Interest'. MacMillan, New York.

· Fisher, Irving (1930): The Theory of Interest. MacMillan, New York.

· Froyen T. Richard(2005):'Macroeconomics Theories and policies,8^th edition, USA

· J.B.F Belong (2002): Macroeconomic 2^nd edition.

· John Maynard K. (1936) `The general theory of Employment, Interest rate and Money' 1^st edition, UK.

· Marshall A (1890), `Principle of economics' London, UK.

· Milton Friedman (2008) `Theory of the Consumption Function' Princeton University Press and copyrighted: USA.

· Newbold, P. (1977)' the time series approach to econometric model building» in new method on business cycle research: Proceedings from a conference, edited by C.A Sims Federal Reserve Bank of Minneapolis.

· Ramathan, R. (1992) «, Introductory Econometrics with Applications» Second Edition. Hartcout New York, Brace Javanovic.

· Samuelson, Paul A (1937): «A note on measurement of utility,» The Review of Economic Studies, 4(2), 155-161

(B) Journals

· Granger C. W.J (1997)' Modeling the long run in Applied Economics' Economic Journal: Cambridge University Press.

· Pablo Cotler and Deyanira A. (2013) The Business and Economics Research Journal: Volume 6, Issue 1, 2013, 69-81, Brighton, UK.

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(C) Reports

· Enquete Integrale sur les conditions de vies des ménages (ECV): Kigali, National Institute of Statistics of Rwanda.

· NISR (2012)' The Fourth population and housing Census», Rwanda Retrieved February, 26, 2015: From National Institute of Statistics of Rwanda.

· NISR (2014) `Indicators of Agriculture Share on GDP», Kigali- Rwanda.

· NISR (2014) `Statistical Year Book' 2014, Kigali: National Statistics of Rwanda.

· NISR (2015a): Main Indicators report. `Integrated Household Living Conditions Survey'

· NISR (2015b) Rwanda Poverty Profile 2013-2014 `Results of Integrated Household living Conditions Survey', Kigali, National Institute of Statistics of Rwanda.

· NISR(2015) `Industries' contribution to the Rwandan Economy', Kigali-Rwanda

· REMA (2013) `State of environment and outlook report», Kigali.

· REMA (2015) `A toolkit for the development of smart green villages in Rwanda', Kigali.

· UNDESA (2014) Country profile, Rwanda:» Retrieved May 16, 2015, From United Nations, department of economic and social affairs» population division, (2014): World Urbanization prospect.

(D) Unpublished

· U.L.K (2016) `Handout of macroeconomics, Year 3': Kigali Campus

· World Bank (2014a) `Support to Rwanda Transformation of Agriculture sector Program Phase3-Program-for-Results (P148927), Environmental and social systems assessment (ESSA). The World Bank Group.

· World Bank (2014b) `Rwanda Economic Update', edition N^o 6, Unearthing the Subsoil Mining and its contribution to National Development: The World Bank Group..

(E) Electronic Sources

· Www. [e-mail]

68

APPENDICES

69

APPENDICES I

Vector Auto-regression Estimates

Date: 08/12/16 Time: 20:50

Sample (adjusted): 1997 2015

Included observations: 19 after adjustments

Standard errors in ( ) & t-statistics in [ ]

LNGCE LNGDP INT INF LNEXCH

LNGCE(-1) 0.899273 -0.935539 3.357366 -69.72302 0.419394

(0.84695) (0.47771) (2.69818) (30.6650) (0.46412)

[-1.06178] [-1.95840] [ 1.24431] [-2.27370] [ 0.90363]

LNGCE(-2) -0.617865 -1.231620 3.074383 -21.55429 -0.277260

(0.94943) (0.53551) (3.02465) (34.3754) (0.52028)

[-0.65078] [-2.29991] [ 1.01644] [-0.62703] [-0.53291]

LNGDP(-1) 2.170781 2.036976 0.545987 112.6920 -0.467200

(1.08084) (0.60963) (3.44331) (39.1335) (0.59229)

[ 2.00842] [ 3.34134] [ 0.15856] [ 2.87968] [-0.78880]

LNGDP(-2) 0.089172 0.617072 -4.684257 -41.62889 0.427809

(1.21598) (0.68585) (3.87382) (44.0263) (0.66635)

[-0.07333] [ 0.89972] [-1.20921] [-0.94555] [ 0.64202]

INT(-1) 0.130199 0.133022 0.178025 7.127216 -0.048968

(0.08519) (0.04805) (0.27141) (3.08459) (0.04669)

[ 1.52826] [ 2.76827] [ 0.65593] [ 2.31058] [-1.04888]

INT(-2) -0.014810 0.038596 -0.440924 -1.075148 -0.021684

(0.06972) (0.03932) (0.22210) (2.52415) (0.03820)

[-0.21244] [ 0.98155] [-1.98527] [-0.42594] [-0.56759]

INF(-1) -0.007165 -0.006390 -0.053345 -0.569278 -0.006710

(0.01031) (0.00581) (0.03284) (0.37321) (0.00565)

[-0.69511] [-1.09902] [-1.62447] [-1.52537] [-1.18786]

INF(-2) -0.001416 0.001014 0.029837 -0.146464 -0.004654

(0.00684) (0.00386) (0.02180) (0.24776) (0.00375)

[-0.20697] [ 0.26263] [ 1.36865] [-0.59115] [-1.24111]

LNEXCH(-1) -0.000271 -0.039869 1.475965 -7.739846 0.924791

(0.51597) (0.29103) (1.64377) (18.6816) (0.28275)

[ 0.00053] [-0.13700] [ 0.89791] [-0.41430] [ 3.27071]

LNEXCH(-2) 0.123371 0.357768 -2.060134 20.95787 -0.021807

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	(0.56873)	(0.32078)	(1.81185)	(20.5919)	(0.31166)
	[ 0.21692]	[ 1.11529]	[-1.13703]	[ 1.01777]	[-0.06997]
C	0.034490	-1.478500	9.862714	-53.04916	1.245924
	(1.32734)	(0.74866)	(4.22861)	(48.0585)	(0.72737)
	[ 0.02598]	[-1.97485]	[ 2.33238]	[-1.10385]	[ 1.71291]
R-squared	0.994725	0.998666	0.972631	0.801377	0.985683
Adj. R-squared	0.988131	0.996999	0.938419	0.553098	0.967786
Sum sq. resids	0.051826	0.016487	0.525985	67.93888	0.015563
S.E. equation	0.080487	0.045397	0.256414	2.914166	0.044106
F-statistic	150.8530	599.0038	28.42987	3.227731	55.07711
Log likelihood	29.13108	40.01133	7.115920	-39.06444	40.55951
Akaike AIC	-1.908535	-3.053824	0.408851	5.269941	-3.111527
Schwarz SC	-1.361754	-2.507044	0.955631	5.816722	-2.564747
Mean dependent	7.254886	7.458007	17.54053	6.294737	6.225143
S.D. dependent	0.738783	0.828705	1.033282	4.359214	0.245744
Determinant resid covariance (dof
adj.)		6.99E-11
Determinant resid covariance		9.25E-13
Log likelihood		128.4321
Akaike information criterion		-7.729693
Schwarz criterion		-4.995790

System: UNTITLED

Estimation Method: Least Squares Date: 08/11/16 Time: 20:44 Sample: 1997 2015

Included observations: 19 Total system (balanced) observations 95
	Coefficient	Std. Error	t-Statistic	Prob.
C(1)	-0.899257	0.846944	-1.061766	0.2947		C(2)
-0.617883	0.949425	-0.650798	0.5189	C(3)
2.170760	1.080837	2.008406	0.0414	C(4)
-0.089151	1.215976	-0.073317	0.9419	C(5)
0.130199	0.085195	1.528257	0.1343	C(6)
-0.014809	0.069715	-0.212417	0.8329	C(7)
-0.007165	0.010308	-0.695113	0.4910	C(8)
-0.001416	0.006843	-0.206958	0.8371	C(9)
0.000271	0.515974	0.000525	0.9996	C(10)
0.123375	0.568734	0.216929	0.8294	C(11)
0.034467	1.327341	0.025967	0.9794

Source: World Bank indicators1995-2015 and author's computation

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APPENDICES II

Effects of changes in GDP, interest rate, inflation and exchange rate on gross consumption
expenditure in Rwanda

Co-integration test

Date: 08/11/16 Time: 20:24

Sample (adjusted): 1997 2015

Included observations: 19 after adjustments

Trend assumption: Linear deterministic trend

Series: LNGCE LNGDP INT INF

LNEXCH

Lags interval (in first differences): 1 to 1

Unrestricted Co-integration Rank Test (Trace)

Hypothesized No. of CE(s)	Eigenvalue	Trace Statistic	0.05 Critical Value	Prob.**
None *	0.986335	149.9639	69.81889	0.0000
At most 1 *	0.862347	68.39784	47.85613	0.0002
At most 2 *	0.614846	30.72045	29.79707	0.0390
At most 3	0.446337	12.59231	15.49471	0.1306
At most 4	0.069054	1.359523	3.841466	0.2436

Trace test indicates 3 co-integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Co-integration Rank Test (Maximum Eigenvalue)

Hypothesized No. of CE(s)	Eigenvalue	Max-Eigen Statistic	0.05 Critical Value	Prob.**
None *	0.986335	81.56606	33.87687	0.0000
At most 1 *	0.862347	37.67739	27.58434	0.0018
At most 2	0.614846	18.12814	21.13162	0.1251
At most 3	0.446337	11.23279	14.26460	0.1429
At most 4	0.069054	1.359523	3.841466	0.2436

Max-eigenvalue test indicates 2 co-integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

Source: World Bank indicators1995-2015 and author's computation